McDonald's 2020
United Technologies Suggested solution
1. ROCE 2017 2016 2015 2014 2013 NICS = NI 4,552 5,055 7,608 6,220 5,721 Equity 31,421 29,169 28,844 32,564 33,219 NCI 1,811 1,590 1,486 1,351 1,353 CSE (Equity - NCI) 29,610 27,579 27,358 31,213 31,866 Average CSE 28,595 27,469 29,286 31,540 28,890 ROCE 15.9% 18.4% 26.0% 19.7% 19.8%
2. Comprehensive earnings 2017 2016 2015 2014 2013 NI 4,552 5,055 7,608 6,220 5,721 UGL on AFS (348) 60 (15) 12 151 Derivatives 234 177 (130) (130) (82) Pension related 393 90 574 (2,442) 2,983 FCT 610 (1,089) (1,460) (1,295) (498) Total OCI - overall 889 (762) (1,031) (3,855) 2,554 OCI to NCI 80 (47) (73) (74) (14) OCI to United tech 809 (715) (958) (3,781) 2,568 Comprehensive earnings to United 5,361 4,340 6,650 2,439 8,289 Operating OCI 809 (715) (958) (3,781) 2,568
Assuming no FA, there is no FA related OCI. Thus OCI = Operating OCI. Note that OCI = Operating OCI + FA related OCI + Debt related OCI. Debt related OCI in this case is also zero.
4. Debt, Financial Expense and Weighted average of borrowing cost Debt 2017 2016 2015 2014 2013 Commercial paper 300 522 727 200 Other borrowing 92 79 199 126 188 Current portion of LTD 2,104 1,603 179 1,791 112 Total short-term debt 2,496 2,204 1,105 1,917 500 LTD (excluding current portion) 24,989 21,697 19,320 17,784 19,741 Total Debt 27,485 23,901 20,425 19,701 20,241
Financial expense 2017 2016 2015 2014 2013 Interest expense 1,017 1,161 945 1,099 1,032 Less : Non-debt related interest expense 34 41 34 179 50 Amortized Cap interest 10 9 12 12 11 Financial expense, BT 993 1,129 923 932 993 Financial expense, AT 625.6 711.3 581.5 587.2 625.6 Borrowing Costs, AT 2.43% 3.21% 2.90% 2.94% 2.88% Average Debt 25,693 22,163 20,063 19,971 21,731 Borrowing cost = Financial expense/Av Debt, and for tax effect, use statutory tax rate, 37%.
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Weighted Average of borrowing cost Rate 2017 2016 Average debtCommercial paper 1.10% 300 522 411
Other borrowing 1.10% 92 79 85.5 1.80% notes due 2017 1.80% 0 1,500 750 6.80% notes due 2018 6.80% 99 99 99 EURIBOR plus 0.80% floating rate notes due 2018 (€750 million principal value) 0.47% 890 783 836.5 1.78% junior subordinated notes due 2018 1.78% 1,100 1,100 1,100 LIBOR plus 0.350% floating rate notes due 2019 2.04% 350 350 350 1.50% notes due 2019 1.50% 650 650 650 EURIBOR plus 0.15% floating rate notes due 2019 (€750 million principal value) -0.18% 890 0 445 8.88% notes due 2019 8.88% 271 271 271 4.88% notes due 2020 4.88% 171 171 171 4.50% notes due 2020 4.50% 1,250 1,250 1,250 1.90% notes due 2020 1.90% 1,000 0 500 8.75% notes due 2021 8.75% 250 250 250 1.95% notes due 2021 1.95% 750 750 750 1.13% notes due 2021 (€950 million principal value) 1.13% 1,127 992 1,059.5 2.30% notes due 2022 2.30% 500 0 250 3.10% notes due 2022 3.10% 2,300 2,300 2,300 1.25% notes due 2023 (€750 million principal value) 1.25% 890 783 836.5 2.80% notes due 2024 2.80% 800 0 400 1.88% notes due 2026 (€500 million principal value) 1.88% 593 522 557.5 2.65% notes due 2026 2.65% 1,150 1,150 1,150 3.13% notes due 2027 3.13% 1,100 0 550 7.10% notes due 2027 7.10% 141 141 141 6.70% notes due 2028 6.70% 400 400 400 7.50% notes due 2029 7.50% 550 550 550 5.40% notes due 2035 5.40% 600 600 600 6.05% notes due 2036 6.05% 600 600 600 6.80% notes due 2036 6.80% 134 134 134 7.00% notes due 2038 7.00% 159 159 159 6.13% notes due 2038 6.13% 1,000 1,000 1,000 5.70% notes due 2040 5.70% 1,000 1,000 1,000 4.50% notes due 2042 4.50% 3,500 3,500 3,500 4.15% notes due 2045 4.15% 850 850 850 3.75% notes due 2046 3.75% 1,100 1,100 1,100 4.05% notes due 2047 4.05% 600 0 300 Project financing obligations 158 155 156.5 Other (including capitalized leases) 195 189 192 Other (fair market value adjustments, discounts and debt issuance costs) -25.0 1.0 -12.0
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Total debt 27,485.0 23,901.0 25,693
BT AT Weighted average of borrowing cost 3.55% 2.24% Theoretical Interest expense 912.3
There are some difference between 2.43% and 2.24%, but not huge. This can be due to some debt are issued earlier in 2017 (2027 debt and 2047 debt). The average (of debt) assumes that the debt are issued at the middle of the year.
5,7,8, 10, 11 and 13 NOPAT, RNOA, Reconciliation with ROCE, and EPS growth NOPAT 2017 2016 2015 2014 2013 NI 4,552 5,055 7,608 6,220 5,721 Add: financial expense, AT 625.6 711.3 581.5 587.2 625.6 NOPAT 5,178 5,766 8,189 6,807 6,347
NOA 2017 2016 2015 2014 2013 Equity 29,610 27,579 27,358 31,213 31,866 Add : Debt 27,485 23,901 20,425 19,701 20,241 NOA 57,095 51,480 47,783 50,914 52,107 Av NOA 54,288 49,632 49,349 51,511 50,621
Overall, NOA increased a lot. Major reasons are increase in cash, A/R, inventories and fixed assets. Cash in fact can be considered as financial assets, so it’s not a concern. But increase in A/R and inventories are not good, given that sales increased only 1.5%.
RNOA = NOPAT/Av NOA 9.54% 11.62% 16.60% 13.22% 12.54% ROCE 15.92% 18.40% 25.98% 19.72% 19.80%
Reconciliation of ROCE ad RNOA (ROCE = RNOA + (RNOA-BC, AT) x leverage)
RNOA 9.54% 11.62% 16.60% 13.22% 12.54% Leverage 89.85% 80.69% 68.51% 63.32% 75.22% (RNOA-BC) x Leverage 6.38% 6.78% 9.38% 6.51% 7.27% RNOA + (RNOA-BC) x Leverage 15.92% 18.40% 25.98% 19.72% 19.80%
Leverage is working great for the shareholders (ROCE>RNOA), but the level of leverage is bit worrisome, since the borrowing cost will be higher in the future.
EPS growth vs NOPAT growth 2017 2016 2015 2014 2013 EPS 5.76 6.18 8.72 6.92 6.35 NOPAT 5,178 5,766 8,189 6,807 6,347
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# share outstanding in EPS 790 818.2 873 898 901
Growth in EPS -6.8% -29.1% 26.0% 9.0% 10.8% Growth in NOPAT -10.2% -29.6% 20.3% 7.3% 11.8% Growth in Fin exp -12.0% 22.3% -1.0% -6.1% 14.8%
EPS growth is larger in 2017 since weighted # of shares outstanding decreased and financial expense decreased. Keep in mind that the numerator for EPS is NICS (same as NI, and same as NOPAT - Fin expense).
9. Comprehensive NOPAT and FCF - Operating Comp NOPAT 2017 2016 2015 2014 2013 NOPAT 5,177.6 5,766.3 8,189.5 6,807.2 6,346.6
Operating OCI (=OCI) 809.0 (715.0) (958.0) (3,781.0) 2,568.0 Comprehensive NOPAT 5,986.6 5,051.3 7,231.5 3,026.2 8,914.6
Comp. NOPAT 5,986.6 5,051.3 7,231.5 3,026.2 8,914.6 Less : change in NOA (5,615.0) (3,697.0) 3,131.0 1,193.0 (2,972.0) FCF - operating 371.6 1,354.3 10,362.5 4,219.2 5,942.6
FCF - financial perspective Comprehensive Fin expense 2017 2016 2015 2014 2013 Comprehensive Fin expense 625.6 711.3 581.5 587.2 625.6
Add : Net div 3,330 4,119 10,505 3,092 2,337
Less: Change in debt 3,584.0 3,476.0 724.0 (540.0) (2,980.0) FCF - financial 371.6 1,354.3 10,362.5 4,219.2 5,942.6
Comp fin exp = Fin exp + FL related OCI (=0 in this case)
3. Net dividend Quick formula : CSE, BB + Comp income - Net dividend = CSE, EB Net Dividend = CSE, BB - CSE, EB + Comp Income Net dividend 2017 2016 2015 2014 2013
CSE, BB 27,579 27,358 31,213 31,866 25,914 Less: CSE, EB 29,610 27,579 27,358 31,213 31,866 Comp Income 5,361 4,340 6,650 2,439 8,289 Net dividend 3,330 4,119 10,505 3,092 2,337
Top-down approach (or component based approach) Net dividend 2017 2016 2015 2014 2013 Cash dividends 2,074 2,069 2,184 2,048 1,908
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Div to ESOP 72 74 75 71 69 Repurchase, net 1,452 2,254 10,000 1,500 1,200
Common Stock issued - equity unit settlement (1,100) Common Stock issued under employee plans (348) (281) (394) (598) (889) CS contributed to defined benefit (250) Purchase of sub shares (4) 8 12 75 49 Sale of sub shares in NCI (24) (4) Equity units issuance Redeemable noncontrolling interest accretion 1 2 Redeemable noncontrolling interest FV adj 89 Other (5) (6) Net dividends 3,330 4,119 10,505 3,092 2,337 Even if it is not asked, you have to reconciled formula based approach with component based approach. Otherwise, it is impossible to comments on it. Also keep in mind that formula based approach is bottom up approach, meaning that net dividend does not consists of CI to CS and Change in CSE.
6. effective tax rate 2017 2016 2015 2014 2013 Effective tax 36.6% 23.8% 32.6% 25.8% 26.1%
13. NCI related question :With respect to NCI, typical analysis is based on comparing ROCE when NCI is part of equity. This means that United Tech would purchase the remaining shares of NCI company. However, one thing to make sure is that how it pays: cash or swap with equity. In case of paying cash, the following would happened. It’s likely that acquiring company would have to pay premium (goodwill) over the book value. Let’s assume that remaining NCI has assets of 80, liab of 30, thus book value of NCI (NCI equity) is 50. Acquiring company pays 100 (paid 50 premium, and this is goodwill)
Case A Remaining assets of NCI 80 Goodwill 50 Remaining liab of NCI 30 Cash 100 If there is no goodwill (meaning that acquiring company paid 50) Case B Remaining assets of NCI 80 Remaining liab of NCI 30 Cash 50
In both case A and B, increase in assets is 30 and liabilities increases by 30, and no increase in equity. If it pays with stock (equity swap), most likely, it would use treasury stock. Case C Remaining assets of NCI 80 Goodwill 50
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Remaining liab of NCI 30 Treasury 100
Case D Remaining assets of NCI 80 Remaining liab of NCI 30 Treasury 50
In this case, equity can increase, either by NCI equity (50) or more (NCI equity + Goodwill) Thus, adding NCI equity to CSE is assuming that there is no goodwill, and equity is issued.
In other words, adding NCI equity to CSE to get equity including NCI works only when stock is medium of payment and there is no goodwill. In case when cash is paid, the denominator is still CSE. In this case, ROCE will increase as long as NCI income is positive. In this aspect, the question is, is it wise to spend cash to acquire NCI company, vs, treasury stock. Keep in mind that RNOA doesn’t change.
Balance sheet With NCI Cash purchase Equity swap GW= 50 GW= 0 GW= 50 GW= 0
Asset 1,000 950 950 1,050 1,000 Liab 400 400 400 400 400 CSE 550 550 550 650 600 NCI 50 0 0 0 0
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